2016 Survey: Board of Director Evaluation and Effectiveness

2016 Survey: Board of Director Evaluation and Effectiveness

By
David F. Larcker, Stephen Miles, Taylor Griffin, Brian Tayan
CGRI Survey Series. Corporate Governance Research Initiative, Stanford Rock Center for Corporate Governance, and The Miles Group, November
2016

In the summer of 2016, the Rock Center for Corporate Governance at Stanford University along with The Miles Group conducted a nationwide survey of 187 board directors of public and private companies.

The study reveals that while boards generally rate themselves positively in terms of skills and expertise, significantly high negatives are a cause for concern for a large number of firms.

Key findings include the following:

Directors Generally Believe Their Boards Have the Skills Needed to Advise and Oversee Their Companies

The vast majority (89 percent) of respondents say that their board has the skills and experience necessary to oversee the company.

Boards are less effective in taking proactive steps to ensure that they maintain a proper mix of skills. Only half (57 percent) of directors strongly agree or agree that their board is effective in bringing new talent to refresh the board’s capabilities before they become outdated, and only one-third of directors (34 percent) rate their board very positively on planning for director turnover.

Board Evaluations Are a Work in Process

Satisfaction levels with board evaluations are modest. Among companies that conduct evaluations, only 78 percent of directors are satisfied or very satisfied.

Board evaluations appear to be much less effective at the individual level. Only half (55 percent) of companies that conduct board evaluations evaluate individual directors, and only one-third (36 percent) believe that their company does a very good job of accurately assessing the performance of individual directors.

Boards Fall Short on Several Critical Dimensions

The results suggest that boards can improve in the following areas:

Trust Levels Are High, but Not High Enough

Only two-thirds (68 percent) of board members say they have a very high level of trust in their fellow directors.

Directors Do Not Give Each Other Honest Feedback

Only a quarter (23 percent) of board members rate their boards very effective at giving direct feedback to fellow directors.

Boardroom Dynamics Are Sub-Optimal

Directors report considerable shortcomings in group dynamics:

  • Directors do not invite the active participation of all members.
  • Directors allow personal or past experience to dominate their perspective.
  • Directors do not express their honest opinions in the presence of management.
  • Directors are too quick to come to consensus.
  • Directors do not understand the boundary between oversight and actively trying to manage the company.
  • Fellow board members derail the conversation by introducing issues that are off-topic.

Female Directors Assess Board Members More Negatively

Finally, female directors are significantly more likely to have negative views on their boards in the following dimensions:

  • The effectiveness of their fellow directors
  • The skills of their fellow directors
  • The board’s ability to evaluate and give feedback to fellow directors
  • Boardroom dynamics

Recommendations

To improve board functioning, the authors recommend the following:

  1. Conduct a diagnostic where each director’s input is solicited around a variety of critical topics: board effectiveness, committee effectiveness, current board composition, the forward-looking needs of the board to meet the strategic needs of the enterprise, board structures and processes, agendas and materials, board interface with management, board succession process, and board leadership.
  2. Provide a detailed report of the findings. Include recommended actions based upon short-, medium-, and long-term timeframes. Develop a skills-and-experience matrix to assist with board refreshment efforts, individual director coaching plans, and feedback sessions to provide directors with more detailed feedback around their effectiveness.
  3. Create a process that is as independent as possible. Identify a point person on the board accountable for managing the process and following through on its recommendations. Develop a process for removing underperforming directors.